Read our latest interactive report on the bulk annuity market.
In the second part of our bulk annuities market report we examine the impact of Covid-19 on longevity and mortality assumptions.
We also analyse how changes to these assumptions might affect defined benefit (DB) pension schemes and bulk annuity pricing.
Covid-19 mortality and its effect on pension schemes
The pandemic has led to a sharp increase in reported deaths, with the numbers in 2020 and 2021 being significantly higher than deaths reported in previous years.
However, the actual direct impact on a pension scheme’s liabilities is likely to be small and highly dependent on the demographics of the scheme in question.
"A key challenge for pension trustees is to assess the impact of the Covid-19 pandemic on future mortality rates as these figures are likely to be affected in the short to medium-term as a result of the pandemic."
In turn, this affects members’ assumed life expectancies and, accordingly, the value placed on the pension scheme liabilities.
Key findings
Additional deaths in England and Wales during 2020 and 2021 as a result of the pandemic.
Average reduction in a scheme’s liabilities as a direct result of these additional deaths.
Upper estimate within the observed range for schemes of the life expectancy reduction, due to the impact of the pandemic.
Understanding the pandemic’s impact on bulk annuity pricing
We show that, for an example scheme, if insurers were to allow for a 2% reduction in life expectancy – an upper estimate observed for schemes – this could reduce the time to buyout by around a year.
The ultimate impact of the pandemic on a scheme’s term to buyout will depend on how insurers adjust their pricing in light of the pandemic. What seems clear is that, in the short-term, there is likely to be limited impact on buyout pricing.
However, the bulk annuity market is precisely that: a market. It is influenced by demand and supply dynamics and it is competitive in nature. An insurer choosing to reflect lower life expectancies in their pricing may have first-mover advantage, encouraging others to reassess their assumptions.
"Buyout pricing may change in the future as further information on the medium-term impacts arises."
Longevity reinsurance and the bulk annuity market
The reinsurance of longevity risk plays a key role in how the bulk annuity market operates.
We therefore spoke with Howie Timothy of Pacific Life Re, a large global reinsurer specialising in the management of longevity and mortality risk.
Read Howie’s views on (among other things) how Covid-19 has impacted pricing and what his firm is doing to support a rapidly growing bulk annuity market.
Please contact Simon Bramwell or Jack Carmichael if you would like to discuss
any of the above topics in more detail.
More on the DB pensions endgame journey
Bulk annuities: navigating the de-risking journey
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